Egypt faces huge funding shortfall
As the cheers on the street fade from the removal of president Mohammed Morsi, Egypt's interim government will face the sobering task of securing almost US$20 billion in funds to help avoid a fiscal meltdown.
The newly appointed leader Adly Al Mansour will have to prioritise rebalancing public finances, alongside other pressing duties of forming a transitional government and setting a timetable for elections, say economists.
Little anxiety about the severity of such challenges was reflected in buoyant Egyptian markets yesterday on a day Mr Mansour, the top judge of Egypt's Constitutional Court, was sworn into power.
The EGX30 Index of Egyptian equities rose by 7.3 per cent to 5,334.54, while yields on sovereign bonds maturing in 2020 dropped by 127 basis points to 9.16 per cent. But analysts say the "relief rally" is likely to be short-lived.
"The enormity of the challenge facing Egypt will quickly come back into focus, at a time when social discontent is higher and the likelihood of an IMF programme probably lower," Raza Agha, chief economist, Middle East and Africa, VTB Capital, wrote in a research note yesterday.
Long before Mr Morsi's depature, Egypt had been spiralling towards a fiscal crisis, brought on by instability that followed the overthrow of Hosni Mubarak after 29 years in power. Egypt's fiscal deficit has ballooned to more than 12 per cent of GDP, while the country faces having to roll over public debts every year of around 25 per cent of GDP.
In the absence of a breakthrough in talks with the IMF over a US$4.8 billion loan, Egypt had been surviving on assistance from donors including Qatar, Turkey, Saudi Arabia, and the US.
Without an IMF deal, the government's external financing requirements for the fiscal year from July to June next year were $19.5bn, estimates VTB Capital.
"In the absence of fresh Arab aid, we think Egypt has a space of six months before the external position tightens markedly again," Jean-Michel Saliba, Eastern Europe, Middle East and Africa economist at Bank of America Merrill Lynch, wrote in a note. "We doubt material fiscal reforms can credibly take place and think an IMF deal is unlikely to be concluded in the transition period."
Further Qatari support was "improbable," although the rollover of some of the $5bn to $8bn in funds already extended was likely, he wrote.
Instead, several observers say the funding shortfall may be made by both Saudi Arabia and the UAE, neither of which was a supporter of Mr Morsi's Muslim Brotherhood regime.
In the longer term, whatever transitional - and then elected - government comes to power will have to walk a tightrope between improving the lives of ordinary Egyptians and modernising the economy.
A currency that has depreciated 12 per cent since December is driving up prices of food and other everyday items for citizens. In May, the annual urban inflation rate stood at 8.2 per cent, up from 8.1 per cent the previous month.
Economic growth stands at its lowest in more than two decades, while unemployment has risen to a record 13.2 per cent.
But if Egypt is serious about taking an IMF loan it will have to take painful decisions including cutting food and fuel subsidies, which now account for more than 8 per cent of GDP.
Still, some observers are optimistic.
"Under the Morsi regime necessary economic reforms were impeded by the deadlock between the Muslim Brotherhood and the old regime loyalists," Hasnain Malik, of Frontier Alpha Research, a Dubai-based financial research company, wrote in a research note. "A break in that deadlock, brought about by the military's intervention, does not guarantee but significantly improves the prospects of those reforms being undertaken."
Published: July 5, 2013 04:00 AM